Notes for trust officers, private bankers and others concerned with estate and trust planning, from a Merrill Anderson Senior Editor and his retired mentor.

Thursday, April 11, 2013

A block on the "super IRA"

You may recall that last year Mitt Romney revealed he had an IRA worth between $20.7 million and $101.6 million. How is that possible, when the contribution limits are so low? Two elements. First, Romney had participated in an SEP-IRA, which had much higher limits. Second, his employer, Bain Capital, permitted plan participants to invest in its takeover deals. Some of these were spectacularly successful. Per the Wall Street Journal, some Bain employees saw their IRAs blossom 583-fold in just 20 months.

Obama would like to put a brake on that. Once your retirement account is more than $3 million, no more contributions for you. However, the account could keep growing, so in fact the $100 million IRA remains theoretically possible. Here's how Tax Notes explains it:

While the administration has been describing the proposal as a
$3 million limit to tax-preferred retirement accounts, the green book
explanation of the provision states that taxpayers would be prevented
from making additional contributions or receiving additional accruals in
retirement plans in excess of the amount necessary to provide for the
maximum annuity allowed for tax-qualified defined benefit plans.

Section 415 currently limits that amount to $205,000,
payable in the form of a joint and 100 percent survivor benefit
commencing at age 62. That amount is adjusted for inflation. Under
Obama's proposal, the maximum accumulation currently for a person age 62
would be approximately $3.4 million. The green book states that assets
in the plans could continue to grow with investment earnings and gains,
even if a taxpayer was prohibited from contributing. A taxpayer subject
to the limitation at one point could make additional contributions if
his investment performance was lower than actuarial assumptions, or if
the maximum defined benefit level increased because of cost of living
adjustments. Excess contributions and accruals would be treated
similarly to excess deferrals under current law.

Interestingly, they do not mention any dollar impact of this proposal, which suggests that it is negligible. This change would be for the sake of "fairness," that is, for the sake of appearances. But it would be a nightmare to administer.